The economy in the Fourth District grew at a moderate pace during the past six weeks. Manufacturers reported that business conditions have improved. Activity in residential and nonresidential construction picked up slightly. Comments by retailers about January sales were mixed, while auto sales dipped along seasonal trends. Activity in shale gas drilling and production expanded. Freight transport volume trended higher. And the demand for business and consumer credit improved slightly.

Our contacts indicated that hiring by manufacturers and energy producers has increased, though the recruitment of high-skilled workers remains difficult. Reports from staffing-firm representatives tended toward the negative. Two of our contacts noted a slight decline in the number of permanent job openings, while others observed a small drop in the number of placements. Wage pressures were largely contained. Price increases were mainly limited to metals and to materials and equipment used by energy producers and freight carriers.

Manufacturing New orders and production at District factories were generally stable or moderately higher during the past six weeks. A few manufacturers told us that growth was being tempered by lessening demand from European customers. The majority of our contacts saw a moderate improvement in output compared to year-ago levels. Manufacturers are cautious in their outlook and anticipate modest gains in demand. Most steel producers and service centers reported that shipping volume was trending slightly higher. Demand is being driven by the oil and gas, transportation, and industrial equipment industries. Steel representatives are cautiously optimistic about shipments during the second quarter of 2012, and they expect the positive growth trend to continue. District auto production showed a substantial rise during January on a month-over-month and year-over-year basis. Increases were attributed, in part, to the abatement of supply chain issues.

Capacity utilization remains below normal for the majority of our contacts, with little change expected in the near term. A few manufacturers said that they have been building inventories to meet approaching seasonal demand; otherwise, inventories were balanced with orders. Nearly half of our contacts reported that their capital budgets for 2012 will be higher than in 2011. A slight rise in raw material prices was noted--especially for metals, with increases being passed through to customers. New hiring by manufacturers has become more widespread, though the average number of hires per company is fairly low. Those adding to payrolls found it difficult to recruit professional and high-skilled production workers. Wage pressures are contained.

ConstructionThe uptick we saw in single-family home construction toward the end of last year has abated somewhat. Nonetheless, builders reported that January sales were above year-ago levels and traffic and inquiries have picked up. Sales contracts were mainly in the move-up price-point categories. Builders' outlook for single-family construction can best be described as uncertain. In contrast, activity in multi-family construction and the conversion of existing properties to rental units is expected to be strong. One of our contacts noted a significant upturn in remodeling and maintenance. Little movement was seen in the list prices or discounting of new homes. A few builders commented that they would like to increase their spec inventory, but they are unable to obtain financing. Employment and wages were stable.

Activity in nonresidential construction for small to medium-size contractors has improved during the past few weeks. Inquiries have shown a modest increase, and backlogs are starting to grow. Construction contracts were primarily with industrial and retail customers. One contact described pockets of significant activity in large commercial construction projects across the District, noting particular strength in northeast Ohio. The outlook by small to medium-size builders has brightened since our last report. One contractor observed that while business is slowly returning to pre-2008 levels, profit margins are still very tight compared with this point in past recoveries. Other than rising prices for steel and drywall, the cost of building materials was steady. We heard two reports about project financing being easier to obtain. Payrolls were little changed, but they are expected to rise slightly in the near future.

Consumer SpendingReports on January retail sales were mixed. According to several of our contacts, the warm winter weather is negatively impacting purchases of seasonal merchandise. However, products used outdoors, such as sporting goods, are selling better than expected. Sales for the first quarter of 2012 are generally expected to improve over prior-year levels, mainly in the low- to mid-single digits. Looking at vendor pricing, reports were also mixed. Retailers told us that lower costs attributable to declining cotton prices were offset by a rise in overseas labor costs. Retailers are satisfied with their inventories except for cold-weather apparel, which is higher than desired. Capital budgets for 2012 will be slightly greater than in 2011 for a majority of our contacts. Outlays will be used mainly for technology enhancements, remodeling, and new store construction. Payrolls at existing stores were stable.

Auto dealers reported a slowdown in new-vehicle sales during January that followed normal seasonal trends. On a year-over-year basis, sales were somewhat higher. A few dealers noted that their inventories are now on the high side but are manageable; others said that inventories are light. The outlook for 2012 was generally optimistic. However, several of our contacts were uncertain about whether or not the sales increases seen during 2011 would be repeated this year. Purchases of used vehicles showed a modest improvement, but inventories were low and prices elevated. On the financing side, interest rates remain competitive, and at the same time it is difficult to arrange financing for customers with low credit scores. Auto dealers looking to hire reported that it is not easy to find qualified candidates, especially sales representatives and service technicians.

BankingDemand for business credit was described as either stable or slightly higher. Any drop-off was attributed to seasonal factors. Requests are being driven by commercial real estate, including spec building, and healthcare. On the consumer side, most of our contacts said that installment loan activity is flat, although auto lending (direct and indirect) continued to show strength. A few bankers reported a decline in the use of credit cards or home equity lines of credit during January. Some stabilization in interest rates for business and consumer credit was observed. In the residential mortgage market, real estate appraisals remain on the conservative side, and a majority of applicants are looking to refinance. No changes were made to loan application standards. Delinquencies were steady or declined across loan categories. Overall core deposits grew, with continued runoff from CDs into more liquid assets. Payrolls were stable, and little hiring is expected in the near term.

EnergyConventional oil and natural gas drilling and production were generally flat since our last report, with little change expected in the upcoming weeks. Our contacts attributed these conditions to eroding natural gas prices and the regulatory environment. Well-head prices for oil were mainly steady. We heard two reports of energy companies redeploying drilling resources from dry gas to the wet gas areas of the Marcellus shale in Pennsylvania and West Virginia. The Ohio Department of Natural Resources has issued 32 Utica shale drilling permits since January 1 and 39 Utica wells are currently being drilled in Ohio. The outlook for coal production during 2012 is similar to 2011 levels. However, output may decline due to lessening demand from electric utility companies and offshore markets. Spot prices for metallurgical and steam coals continued to decline. Almost all of our contacts reported upward pressure on the cost of production equipment and materials. Energy payrolls are trending higher, especially in shale gas. A few small oil and gas producers are experiencing wage pressures brought on by competition from large firms engaged in shale gas exploration and production.

TransportationFreight transport volume has been trending higher during the past few weeks, and for the month of January it was above year-ago levels. Strong demand was seen from automotive, food, and shale gas producers. Our contacts expect volume to grow at a moderate pace during 2012. We continued to hear numerous reports about rising prices for parts, diesel fuel, and other materials. Most of the cost increases were recovered via fuel surcharges and rate adjustments when contracts came due. Capital outlays reached targeted levels for 2011. Almost all of our contacts expect to increase their capital budgets during 2012 over prior year amounts for fleet expansion, replacing aging equipment, and infrastructure improvements. One executive noted that his capital budget for 2012 will be at a pre-recession level. Operators reported hiring for driver replacement or adding capacity, although recruiting qualified drivers is difficult. Some wage pressure exists due to a tightening of the driver pool.